Revisiting Natural Gas

A couple of months back I noted that the U.S. was burning through the stocks of natural gas we store in underground caverns at an unprecedented rate. These are the stocks that provide a buffer so that when the 50 percent of us that heat with natural gas turn on our furnaces each fall there will be enough gas to get through the winter. In the U.S. we usually burn through about two trillion cubic feet of stored natural gas each winter, but during 2012-2013 we went through three trillion, leaving only some 800 billion cubic feet left. If we can’t get two or three trillion cubic feet injected back into the storage caverns before November rolls around this fall, we could see much higher natural gas prices and even calls to dial back the thermostats before the storage caverns run short.

Like nearly everything else in our civilization these days, our ability to adequately restock the storage caverns this summer is a complicated question. Despite all the hype about our supposed 100-year reserve of natural gas, a gas-based industrial revival, and saving Europe from the Russians by shipping them boatloads of cheap liquefied natural gas, our natural gas industry has not been doing very well of late.

Leaving aside issues of what all the fracking for gas might be doing to our drinking water and the accumulation of greenhouse gases in the atmosphere, there is no question that fracking-for-gas has increased our supplies rapidly in the last few years. However, like all good things the rate of growth in our natural gas production is slowing rapidly and may even stop growing long before most expect. U.S. natural gas production grew by seven percent in 2011 and five percent in 2012, but only by one percent in 2013. Some 75 percent of the growth in U.S. natural gas production is now coming from the Marcellus Shale in Pennsylvania and West Virginia. Nearly everywhere else in the country, production is flat or declining.

The gas industry’s underlying problem in recent years has been overproduction, which has kept market prices below the costs of production in many areas. Some gas fields produce “wet” gas, which contains valuable liquids that can be sold to offset the loss of producing gas alone. Unfortunately the most productive region of the Marcellus shale gas field is largely “dry” gas, so that many areas drillers are losing money on every well drilled but are forced to keep drilling and fracking to meet contractual obligations.

Another factor having a major impact on growing our gas supply is that when one strikes gas in the hills of Pennsylvania, there is no easy way to get it to market. While pipelines are being built or upgraded, many wells are shut-in or are forced to sell their gas locally at a steep discount to the prevailing national price. Until recently Wall Street has been happy to finance the billions being spent on drilling and fracking money-losing wells. Loans to money-losing natural gas projects presumably were made in hopes that natural gas prices would soon rise to profitable levels and the money would be paid back. However, basic economics is starting to kick in and it seems as if drilling-at-a-loss may not have much of a future. If this happens, it clearly will not be good for refilling our gas caverns for the winters ahead. The whole issue is murky at the minute. The number of rigs drilling in the Marcellus shale has fallen in recent years, but the industry says it has gotten so much better at drilling and fracking gas wells that the lost drilling rigs were no longer needed. The issue is further muddied by some recent natural gas production reports from the Department of Energy that conflict with other reporting suggesting that some of our gains in natural gas production may be optimistic estimates rather than fact.

On the key issue of whether we can refill the gas caverns this summer in time to avoid shortages in coming winters, the Department of Energy remains optimistic, forecasting that production will increase in 2014. The EIA says increased production coupled with lower demand from the electric power industry (due to higher natural gas prices) will leave our stockpiles in reasonable shape by next November. So far in 2014 we have stored away only 77 billion cubic feet of the 2,600 billion the EIA hopes we will have by November. To achieve this goal, we will have to inject into the caverns some 92 million cubic feet each week between now and November. This rate of injection may be very hard to achieve especially as the increased demand for natural gas to power summer air conditioning has left us with only about 20-30 million excess cubic feet available for storage during recent summer months.

For the coming winter, however, the situation is not hopeless. We are starting about 900 million cubic feet above the empty mark and in some recent mild winters we have withdrawn as little as 1,500 million cubic feet from storage.

The temperatures in the year ahead will be important to what happens to our gas supplies as milder-than-normal summers and winters can cut demand dramatically. Buried in last week’s news was a report that there are early signs that the Pacific Ocean temperature phenomenon known as El Niño is starting to form. If this happens--and we will not know until June, with the effects not being felt until September--we could have a mild winter in the northeastern part of the U.S. this coming year, which could lower natural gas demand and keep prices under control.

For now, all we can do is wait to see how this story plays out. The lesson of all this is that we may not have as much readily producible natural gas as we have been told and that production could be leveling out or even declining within the next few years.

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the daily …

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